Independence Guidelines for IFRS Implementation

PURPOSE

The purpose of this guidance is to provide guidance and interpretation of the firm’s independence policies/procedures for dealing with IFRS convergence assistance to existing assurance client (non-reporting issuers and reporting issuers).

RELEVANT DEFINITIONS

“Reporting Issuer”: An entity that is deemed to be a reporting issuer under the applicable Canadian Provincial or territorial securities legislation, other than an entity that has, in respect of a particular fiscal year, market capitalization and total assets that are each less than $10,000,000.

An entity that becomes a reporting issuer by virtue of the market capitalization or total assets becoming $10,000,000 or more in respect of a particular fiscal year shall be considered to be a reporting issuer thenceforward unless and until the entity ceases to have its shares, units or debt quoted, listed or marketed in connection with a recognized stock exchange or the entity has remained under the market capitalization of total assets threshold for a period of two years.

An entity ceases to be a reporting issuer when its shares, units or debt are not quoted, listed or marketed in connection with a recognized stock exchange or when the entity remains under the $10,000,000 threshold for two or more years.

In the period when an entity makes a public offering:

  • "Market capitalization" is the market price of all outstanding listed securities and publicly traded debt measured at the closing price on the day of the public offering, and
  • "Total assets" is the total assets on the most recent financial statements, prepared in accordance with generally accepted accounting principles included in the public offering document.

In the case of a reporting issuer that does not have listed securities or publicly traded debt, the definition of reporting issuer shall be read without reference to market capitalization.

“Non-reporting issuer”: would include public companies that fall below the market capitalization/total assets threshold above and non-public entities. For clarity, when an entity becomes a reporting issuer by virtue of a public offering, the auditor of the entity is required, from that period forward until the entity ceases to be a reporting issuer, to comply with the specific prohibitions contained in Rule 204.4 that relate to an audit of a reporting issuer. (Rule 204, Guideline P.58)

“Assurance services”: For the purpose of this discussion, services provided in connection with audit or review engagement, including taxation services related to the audit (review of tax provision, etc.), specified auditing procedures and consultation on complex accounting issues are considered to be assurance services.

FIRM GUIDELINES

In general, it is allowed and encouraged for MNP [LLP / S.E.N.C.R.L., s.r.l.] (“MNP”), as external auditors, to assist management in the IFRS conversion process, as we have an intimate knowledge of the business, management and company's current accounting policies. Furthermore, it would also be more efficient for the client to engage the firm to avoid duplication of external review of technical and other project details.

IFRS convergence assistanceservices can include the following:

a)Identification of main GAAP differences, focused on the client’s organization and industry

b)Provision of high-level assessment and diagnostic report of Canadian / IFRS accounting differences and impact on the client’s organization

c)Advice on alternative accounting treatments

d)Advice on management’s analysis/ interpretation of accounting alternatives and their selection of appropriate policies

e)Observation and comments on management’s conversion issues, timeline and risks

f)Observation and comments on management’s project progress

Such IFRS advisory services are considered to be within the definition of “assurance services” (as defined above). In providing such services, we must not:

  • Provide proscribed services (refer to MNP Policies & Guidelines and Rules of Professional Conduct)
  • Be perceived as auditing our own work; or
  • Be perceived as acting as/on behalf of management, including making any management decisions

To provide further clarification, the following guideline provides specific IFRS convergence assistance services the firm can and can’t provide to non-reporting issuers and reporting issuers.

Non-reporting issuers (as defined above)

The provision of IFRS convergence assistanceservices to assurance clients is not strictly prohibited for non-reporting issuers.

Following are some guidelines with respect to specific allowed services to non-reporting issuers:

  • Provide a high level diagnostic assessment of Canadian GAAP vs. IFRS, highlighting the differences and overall impact on the client’s organization and financial information.
  • Observe and provide comments on management’s project launch and planning activities – this can include comments[1] regarding management’s assessment of:
  • The conversion issues. (Direct management to the identification of issues without providing in-depth analysis of the issues and/or providing recommendations on how issue can be addressed within the conversion plans.)
  • Any significant industry specific issues – direct management to the available resources.
  • The implications of IFRS. (Direct management to the identification of the implications of IFRS without providing an in-depth analysis.)
  • The convergence timeline.
  • Advise on available alternative accounting treatments and general interpretations of IFRSs.
  • Advise on available IFRS 1 transitional reliefs, both mandatory and optional reliefs.
  • Advise on management’s analysis / interpretation of accounting alternatives and their selection of appropriate policies. (Review management’s decision at an early stage and form an initial view on whether the accounting policies, as proposed by management, would comply with the requirements of IFRS.)
  • Discuss general issues of recognition, measurement, presentation and disclosure with management.
  • Observe and provide comments on management project progress. (Review management’s decision at an early stage and form an initial view on whether the systems and processes for producing IFRS-based figures would be capable of providing sufficiently reliable estimates for the purpose.)
  • Review, and discuss with management, the processes and systems management has in place to enable it to prepare IFRS-compliant financial statements.
  • Direct management to consider main business impacts expected from the adoption of IFRS – i.e., future budgeting/forecasting, including effects on covenants, bonus calculations, etc.
  • Discuss with audited bodies the implications of IFRS and consider those areas most likely to be affected. (Discussion should not include in-depth analysis of the areas affected and/or recommendation on the convergence plan to address those areas affected.)
  • Undertake an early, provisional overview of the accounting entries and disclosures proposed by management.
  • Prepare sample journal entries illustrating the application of the technical requirements of individual IFRS/IAS standards.
  • Assist in creating templates and instructions for gathering information from business units/subsidiaries to prepare IFRS financial statements.
  • Conduct general training for client personal on the technical aspect of the IFRS/IAS standards.
  • Review final IFRS financial statements (outside the scope of the audit engagement) to provide:
  • Suggestions on whether there are any “gaps” in the financial reporting and/or disclosure
  • Considerations to improve disclosure and financial statement quality.

This should NOT include a full review/audit to ensure accuracy and reasonability of the financial statements and note disclosure. It is only intended to provide management with a high level overview of significant presentation or disclosure items missing (i.e., related party note disclosure is missing, etc.)

  • Provide tax planning advice regarding the change to IFRS.
  • Assist the client in discussions with lendersregarding the IFRS Convergence. (This would be limited to general discussions of IFRS Convergence and deliverance of the “IFRS Lender’s Presentation”. This should not include any client specific discussions – i.e., management’s convergence plan, high level diagnostics of GAAP differences and quantification of the differences relating to the client’s organization, etc.)

The following are prohibited services to non-reporting issuers – the firm may not:

  • Authorize, approve, execute the IFRS convergence plan (or exercise authority) on behalf of the client.
  • Develop an implementation plan, including any assistance with the design of integrated conversion and comprehensive changes to processes, policies and procedures that will incorporate IFRS into the daily operation of the client’s organization.
  • Provide a detailed review of management’s convergence plan and comment on the effectiveness of the plan, including providing an analysis of the deficiencies noted within the convergence plan and recommendations on how to address those deficiencies.
  • Supervising client employees in the IFRS conversion project
  • Advise on or implement systems to prepare information for inclusion in IFRS-based financial statements.
  • Assist in mapping the conversion process and creating an audit trail of the changeover.
  • Determine which recommendations, accounting alternatives and/or accounting policies management should implement that best suits the entity’s reporting needs, if the recommendations were provided by third-party advisors.
  • Make the ultimate decision regarding the accounting policy choice for the organization.
  • Identify and provide an in-depth analysis of conversion issues that are applicable to the client’s organization, including recommendations on how issues can be addressed within the conversion plans.
  • Provide a detailed diagnostic of the Canadian/IFRS accounting differences and the impact on each financial statement line item of the client’s financial statements.
  • Highlight and quantify differences between IFRS and Canadian GAAP.
  • Assess impact of IFRS on opening balances under IFRS.
  • Prepare source documents or underlying data to be used to prepare the IFRS account balances
  • Provide advice on assessing fair value and impairment tests under IFRS models.
  • Calculate / prepare the journal entries required to record the IFRS adjustments in the client’s records.
  • Recommend specific disclosures and the form of presentation of the financial statements.(If the client requires assistance in selecting accounting policies, MNP may direct the client to other public company statements within the same industry for the client to use as guidance.)
  • Assist with the conversion of transitional opening balance sheet, comparative interim and year end financial statements
  • Assist with pro forma financial statements and disclosure requirements
  • Provide an opinion on the final IFRS financial statements (outside the scope of the audit engagement) on whether they are in compliance with IFRS, including an analysis of the accounting treatment of each financial statement line item noting the deficiencies and how those deficiencies can be rectified. (For example, related party note disclosure is deficient as it requires the disclosure of key management’s compensation; certain assets within the PPE should be classified as held-for-sale; etc.)

Where the above services are being performed, engagement teams should take care to ensure that they are included in the independence checklist and memo that is approved – as additional services may be provided during the engagement, a continuous review of the firm’s independence should be undertaken. Any threats arising throughout the engagement (subsequent to initial completion of the checklist/memo) and safeguards applied should be documented. In addition, these should be communicated to the client through the independence letter.

Where significant IFRS convergence assistance services were provided, judgment is required from the GP to determine whether, all things considered, a “reasonable observer” would conclude that MNP was independent.

Safeguards that may be applied pursuant to GP’s judgment include:

  • Ensuring that any IFRS convergence assistanceservices that we have been engaged to perform be properly communicated in the engagement letter and approved by the GP and the client, including sign off by the Audit Committee approving the provision of such services.
  • Consulting on independence matters with a Risk Partner/Manager; Regional Assurance Partner; the Assurance Services Professional Standards Group; or the applicable provincial institute.
  • Ensuring the client is aware of all independence threats identified
  • Having the client engage another firm to perform provide the IFRS convergence assistanceservices.

Reporting issuers (as defined above)

For reporting issuers, our involvement as auditors should be limited to providing insight / interpretation on the accounting policies and alternatives (not directly related to the client’s organization). The prohibitions noted within the non-reporting issuer apply to reporting issuers.

The following prohibitions apply only to reporting issuers – the firm may not:

  • Provide comments on management project progress, including a review management’s decision at an early stage and form an initial view on whether the systems and processes for producing IFRS-based figures would be capable of providing sufficiently reliable estimates for the purpose.
  • Assist in creating templates and instructions for gathering information from business units/subsidiaries to prepare IFRS financial statements.
  • Review, and discuss with management, the processes and systems management has in place to enable it to prepare IFRS-compliant financial statements.
  • Undertake a provisional overview of the accounting entries and disclosures proposed by management.
  • Review final IFRS financial statements (outside of the audit engagement) to provide our views on whether there are any “gaps” in the financial reporting and/or disclosure

Where IFRSconvergence assistanceservicesare provided (within the scope of “assurance services” as defined above) to reporting issuer clients, such services should be communicated to and approved by the reporting issuer's audit committee, board of directors, or equivalent, unless:

  • The services represent less than 5% of total revenues paid by the client to The Firm during the fiscal year in which the services are provided;
  • The services were not recognized as non-audit services at the time of the engagement
  • The services are promptly brought to the attention of the audit committee/board of directors and one or more authorized representatives approve the services prior to the completion of the audit engagement.

It is important to note that MNP should not, under any circumstances, lead/act as part of the project team nor act as management regarding decision making for changes to the project. This should rests solely with management.

SEC registrants

Similarly to Canadian Reporting issuers, where IFRS convergence assistance services are provided (within the scope of “assurance services” as defined by above) to SEC registrants, the services should be communicated to and approved by the reporting issuer's audit committee, board of directors, or equivalent, unless:

oThe services represent less than 5% of total revenues paid by the client to The Firm during the fiscal year in which the services are provided;

oThe services were not recognized as non-audit services (as defined below) at the time of the engagement

oThe services are promptly brought to the attention of the audit committee/board of directors and one or more authorized representatives approve the services prior to the completion of the audit engagement.

"Non audit" services is defined as:

The final rules [of the SEC Auditor Independence rules] explicitly identify several categories of non-audit services that cannot be provided to an audit client. (See below for a discussion of the term audit client.) The explicit categories are (1) bookkeeping or other services relating to the accounting records or financial statements of the audit client, (2) financial information systems design and implementation, (3) appraisal or valuation services, fairness opinions, or contribution-in-kind reports, (4) actuarial services, (5) internal audit outsourcing services, (6) management functions, (7) human resource services, (8) broker dealer, investment adviser, or investment banking services, (9) legal services, (10) expert services unrelated to the audit, and (11) any other service that the Public Company Accounting Oversight Board determines, by regulation, is impermissible.

Where IFRS convergence assistance services are being contemplated for a US reporting issuer, please contact the Assurance Professional Standards Group for guidance on the provision of such services.

[1] Please note that comments to reporting issuers should be limited to general observations – i.e., “Have you considered…”, rather than “The following are some deficiencies in convergence plans… “